As WorldCom Struggles for Stability, Its MCI Phone Unit Underwhelms Wall St.

By BARNABY J. FEDER

Published: May 2, 2002

As the new president and chief executive of WorldCom, John W. Sidgmore, tries to restore Wall Street's faith in the company, one big question involves the future of MCI, WorldCom's most visible link to the typical phone user.

With 20 million customers, 28,000 employees and revenue last year of $13.83 billion, MCI is the nation's second-largest long-distance phone company, after AT&T, and a leading provider of the networks that Internet service companies need to connect consumers and small businesses.

But MCI has come to be seen on Wall Street as a depressing example of the difference between a big business and a good business. Its revenue and profit have both declined as long-distance customers send e-mail and instant messages over the Internet instead of making phone calls, or use cellphones for the calls MCI once carried.

To make matters worse, the giant local phone companies created by the breakup of the old Bell System have begun to win regulatory approval to sell long-distance services in their home markets. These companies -- Verizon, SBC Communications, BellSouth and Qwest -- are expected to take as much as 50 percent of the shrinking land-line long-distance business by 2005. And that market is projected to shrink in the United States in 2005 to $16.2 billion from $18.9 billion last year, according to Forrester Research. Forrester also expects the dial-up data market to slump to $5.4 billion in 2006 from $10.7 billion this year.

The man most responsible for making the best of MCI's tough situation is Wayne Huyard, an 18-year veteran of the company who carries the title of chief operating officer for the MCI unit. Mr. Huyard has put almost all his strategic bets on a new marketing program announced last month called the Neighborhood.

The Neighborhood offers a bundled local and long-distance phone service for a flat monthly rate, which ranges from $49.99 to $59.99 in different parts of the country, not including taxes. By taking MCI full bore into the competition for local phone business -- the company now provides such service to just 1.6 million households -- it expands the market MCI can compete for to $80 billion from $40 billion, Mr. Huyard said. Moreover, customers signing up for the plan generate three times the revenue and twice the earnings before taxes and other expenses as stand-alone long-distance customers.

''What we've launched is the second chapter of MCI's history of dismantling phone monopolies,'' Mr. Huyard said, likening MCI's thrust into local phone service to its early days as the first company to challenge AT&T's long-distance monopoly.

A crucial difference is that the current plan is also a counterattack on the regional Bell companies as they begin bundling their local service with long-distance plans. Regulators have allowed them to re-enter the long-distance market in 11 states, and the regional Bells are expected to enter most others by the end of the year.

Mr. Huyard said the Neighborhood, now offered to about 55 percent of potential customers, or 55 million households, will be extended to 85 percent of the country by next year.

Going on the attack will be a morale booster for MCI, which is supporting the program with its first big advertising campaign in three years, Mr. Huyard said. More important, he is counting on it to allow MCI to report revenue growth by next year.

Few analysts are that optimistic. They say it is unclear which bundles of services will appeal most to consumers. MCI's, for example, does not cover nonvoice traffic like Internet connection or wireless service. Nor is it clear that price competition will not quickly eat into profits.

Charles Golvin of Forrester Research said that MCI's most valuable asset is probably its network and that the company should probably focus more resources on selling access to the network to other carriers rather than courting consumers.

One thing is clear. Many analysts would rather see Wall Street milking MCI than investing in it. Under Mr. Sidgmore's predecessor, Bernard J. Ebbers, WorldCom's strategy had been to strip MCI of the big business customers, which represented its best prospects for growth, then distance the rest of WorldCom as much as possible from the remaining consumer operations.

Indeed, the MCI unit was set up last year as a heavily indebted subsidiary with one mission: generate enough profit from its business to pay down the enormous debts attributed to it on the company's books and cover a 60-cent-a-quarter dividend on the tracking stock carrying the MCI name.

But long before last weekend, when Mr. Ebbers was forced into retirement by disgruntled members of WorldCom's board, most of the assumptions behind the strategy had come unglued. The parts of WorldCom expected to grow rapidly did not, and MCI's business proved weaker than expected. The tracking stock, WorldCom-MCI Group, which initially traded at $17.85, fell 54 cents yesterday to $3.21, a record closing low. WorldCom dropped 27 cents to $2.21.

As analysts see it, MCI has little if any remaining value to investors except its dividend. Jack B. Grubman, a Salomon Smith Barney analyst who had been one of Mr. Ebbers's biggest fans on Wall Street, yesterday estimated that MCI stock, without the dividend, is worth no more than 80 cents a share, or roughly $95 million. And with the dividend's yield almost 75 percent at yesterday's price, the question on Wall Street's mind is how quickly Mr. Sidgmore either sharply reduces it or eliminates it. But doing so while protecting both WorldCom and MCI shareholders will be tricky.

Mr. Sidgmore has shown little interest in MCI's businesses in the past, and on Tuesday, in a conference call with analysts, he said his inclination was to focus on increasing WorldCom's activities with big business customers. ''The fastest way to get growth in a company like this,'' he said, ''is to get big deals with big companies.''